Bonds and Currencies Still Not On Board With Stock Market Rally

Bearish messages continue to be sent from many parts of the global fixed income and currency arenas.

As always, my overall goal with my regular articles on fixed income and currencies is to provide some perspective on whether those two very large, liquid arenas are in agreement with the movements of the equity markets – in addition to pointing out some general areas of strength or weakness in those arenas off of which you can formulate some specific trades. For a while now, the caution signals emanating from the bond and currency arenas have largely been ignored by the equity markets. That, in my opinion, won't last much longer. Either stocks will reverse lower or bonds and currencies will start chiming in on the bullish side of things.

For a while now, the caution signals emanating from the bond and currency arenas have largely been ignored by the equity markets. That, in my opinion, won't last much longer. Either stocks will reverse lower or bonds and currencies will start chiming in on the bullish side of things.

Before we jump into what's going on in bonds and currencies, let's take a look at where we stand on the S&P 500 (INDEXSP:.INX) chart.

STOCKS – Day 1 of April and Still No Serious Selling

Here's a recap of what I saw on Monday (April 1):

We saw some selling pressure yesterday morning – for the first time in quite a while. However, after bottoming in the early afternoon, most equity groups spent the afternoon oscillating higher, lower, and higher again into the close. At the end of the day, we saw very modest losses in the US large cap indices with heavier losses in the rest of the groups – with the worst damage coming in US small and micro-caps as well as in international "core."

The levels to watch will be the mid-afternoon highs from Monday. If those peaks don't hold up as resistance, we could very well see a resumption in the upside bias for equities. How high do I think they'll go? Let's take a look at the S&P chart next.

S&P 500 (Cash):

The S&P closed March out above the previous monthly closing high of 1,563 and change – another win for the bulls out there. However, I would note that the intraday high from 2007 (1,576.09) still stands as obvious resistance (but everyone in the world knows / sees that). What most don't see or at least talk about is that there is projected resistance that comes into play at 1,578.48. That price level would make wave "v" roughly match wave "i" in magnitude AND would make wave "(v)" roughly match wave "(i)" in magnitude as well (see the labeling on the chart). If I see a close in the S&P above 1,578.48, I will honestly be shocked and will have to go back to the drawing board to re-evaluate where things may be headed moving forward.

Unless and until such a breakout happens, though, my most bullish scenario calls for a "normal" corrective pullback to the 1,343 – 1,474.51 range (a 7% - 15% decline, also the previous macro move's fourth wave). The more bearish scenario would have the S&P falling much further than that eventually (with stops along the way, obviously). So, let's see how things play out this week – as I believe we'll see the next big move lower or higher start soon.

Notes: Notice the lower high in RSI even as the price is rising (bearish divergence); also, note the weakening ADX reading (indicating weak momentum during the most recent upside).

OVERALL FOR STOCKS: We're at the proverbial fork in the road that I've been mentioning. Either stocks explode higher from here (confirming the breakouts that already took place in the S&P 500 futures, the Dow Industrials (INDEXDJX:.DJI), and US mid, small and micro caps) or they pull back fairly intensely (confirming the crummy action in international equities, copper futures currencies and bonds). The upside if the breakout occurs could be in the mid-1,700s on the S&P while the downside if the breakdown occurs will be at least to the 1,475 level.

BONDS – Still Not Confirming the Upside in Stocks

Treasury yields are doing the opposite of what the bulls would want them to do.

Treasury yields have been declining conspicuously recently – even as stocks have rallied. This is a divergence that won't last. Either rates will turn and move sharply higher (confirming the up move in stocks) or stocks will turn and move sharply lower (confirming the bearish messages we're seeing from declining yields). Right now, any bounce in yields (if it occurs) should top out at either 1.97% or at previous highs at 2.08 or so.

Emerging market debt continues to trade as if there are real problems in the key emerging market component countries.

The iShares Emerging Markets Bond ETF (NYSEARCA:EMB) is setting new lows almost every day now. This is a clear "risk off" message that is being ignored on a macro basis – even if it's keeping money out of emerging market equities. EMB could bounce once it hits projected support at $116.73, though.

US high yield bonds are rolling over and appear to have some more downside ahead.

I'm seeing about 2% of room to the downside to projected "correction support" for SPDR Barclays Capital High Yield Bnd ETF
(NYSEARCA:JNK). The chart looks bearish in the short-term, though (which means, of course, that it's signaling "risk off" as well).

OVERALL FOR BONDS: It's still a "risk off" warning that I'm seeing in bond land.

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